The real rate of NZ growth

Australian Financial Review ,

7 February, 1995

For many advocates of economic reform in Australia, New Zealand is regarded as the one country that has got things right. In particular, New Zealand's achievement of GDP growth rates around 4 per cent is treated as proof of the success of economic reform (one New Zealand economic commentator recently quoted in AFR likened the difference between the NZ economy in 1994 and in 1984 to that between a Porsche and a Humber). Sir Roger Douglas, former Finance Minister in the Lange government and now leader of the Association of Consumers and Taxpayers is widely credited as being responsible for the current strong GDP growth.

In an important, but ironic, sense, this credit is well-deserved. Under the management of Sir Roger Douglas, the NZ economy delivered negative per capita GDP growth between 1984 and 1991. The three years of expansion since then have just sufficed to raise per capita GDP above the 1984 level. To pursue the motoring analogy, the Porsche may look flashier, but in terms of performance, there is little difference between the two. As we shall see, it is this negative achievement of Rogernomics that is responsible for the statistical successes of New Zealand in the 1990s.

In 1984, New Zealand GDP per capita (adjusted for differences in purchasing power) was about 94 per cent of that of Australia. Workforce participation rates are not massively different in the two countries, so that roughly the same ratio prevailed with respect to output per worker. Under the management of Sir Roger Douglas, the gap widened so that by 1991, on average, NZ workers produced about 80 per cent of the output of their Australian counterparts.

Although this would not normally be considered desirable, such a history of economic failure is of major assistance in achieving high rates of current economic growth. Suppose that, over the course of the 1990s, the losses of the Douglas period could be made up, with the result that the efficiency gap between Australia and New Zealand was returned to the 1984 level. This would require an annual difference in percentage growth rates of more than 1 per cent. If the average Australian industry managed a modest 2 per cent output growth per worker, its New Zealand counterpart would be growing at more than 3 per cent simply by reversing the mistakes of the past.

However, the 'advantages of backwardness' go further than this. Suppose that a given industry, say the computer software industry, is initially equally efficient in Australia and New Zealand. For concreteness, suppose programmers in both countries produce 100 lines of code per day. Now suppose that, under the influence on New Zealand's Employment Contracts Act, the output of NZ programmers rises to 110 lines per day, while under the Australian hybird of awards and enterprise bargaining, the output of programmers rises to 111 lines per day. One might suppose that this represented a win for the Australian system. Not so, according to the GDP growth rate criterion. Because of the inefficiency of the rest of the economy, the 10-line increase in the output of NZ programmers represents a bigger contribution to percentage GDP growth than the 11-line increase of the Australians.

All of this reflects a more fundamental point. The growth rate of GDP is not a sensible guide to the success or failure of policies of microeconomic reform. National income statistics were developed as an adjunct to Keynesian aggregate macroeconomic management. From the viewpoint of Keynesian macroeconomics, the key variable is the percentage growth rate in GDP, which feeds directly into changes in the demand for labour and also, via the demand for investment goods, into accelerator effects on aggregate demand. The Keynesian macro framework is not concerned with the level of GDP per capita or with the technical efficiency with which resources are used. These are correctly regarded as problems to be dealt with by microeconomic policy.

However, when we come to compare the success of microeconomic policies, percentage changes in GDP may be quite misleading. A given productivity improvement in one sector will look better, in terms of its contribution to the rate of GDP growth, the lower is output in the rest of the economy. Thus, the correct criterion in comparing micro-economic policy is the absolute change in GDP per capita rather than the percentage change.

For example, in 1993-94 GDP per capita rose by 4.0 per cent in New Zealand, compared to 3.5 per cent in Australia. However, the absolute increase in per capita GDP was around $US600 in Australia and around $550 in New Zealand. Thus, the gap between the two countries has continued to widen even in years when New Zealand appears to perform better on the . Indeed, given the freedom of movement of both workers and capital between New Zealand and Australia, it is difficult to believe that the gap can grow much larger, even in the unlikely event that Sir Roger becomes prime minister of New Zealand.

Under the management of Sir Roger Douglas, New Zealand recorded the worst economic performance in its post-war history and the worst in the OECD. In terms of absolute growth in GDP per capita, New Zealand is still near the bottom of the OECD league table and, in particular, well below Australia. The inappropriate use of percentage growth rate criteria should not be permitted to disguise the failures of microeconomic policy in New Zealand. Still less should it be used in Australia as a justification for copying the mistakes of others.

John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.